Arbitration In IndiaArbitrability of Frauds in India: Evolving Jurisprudence

Introduction

In India, arbitration is one of the most preferred methods of resolving commercial disputes because it upholds party autonomy, procedural flexibility, and cost-effectiveness. In complex and document-intensive cases, specialized tribunals and streamlined processes frequently offer more efficient and reliable outcomes compared to traditional litigation.

A critical question in this domain is whether disputes involving allegations of fraud are arbitrable. The answer impacts not only the choice of forum but also legal strategy, timelines, options for interim relief, and the enforceability of awards and settlements. Indian jurisprudence has shifted from a broad exclusionary rule towards a more calibrated approach that favours arbitration for most commercial fraud disputes, reserving only a narrow subset for the courts.

This evolution stems from three interrelated developments: the classification of claims based on rights in rem versus rights in personam; a contract-based perspective that upholds the separability of the arbitration agreement; and a statutory framework committed to minimal judicial intervention at the referral stage. These factors have created more stringent criteria for excluding matters from arbitration, reinforced the tribunal’s authority to rule on its own jurisdiction, and minimized the tactical use of fraud allegations to derail arbitration. This article traces this legal evolution and outlines the current position on the arbitrability of fraud in India, offering practical guidance for legal practitioners.

Legal Evolution

For a significant period, Indian courts held that serious allegations of fraud were not suitable for arbitration. The Supreme Court, in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, AIR 1962 SC 406, stated a preference for open court trials in such matters.

This view influenced subsequent decisions, notably N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72. A conceptual pivot occurred with Booz-Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, which distinguished between rights in rem (affecting the world at large), which are generally non-arbitrable, and rights in personam (enforceable against a specific person), which are arbitrable.

The doctrine of separability was further cemented in Swiss Timing Ltd. v. Organising Committee, Commonwealth Games 2010, (2014) 6 SCC 677, which held that an arbitration clause is independent of the main contract and is not invalidated by allegations of fraud concerning that contract.

In A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, the Supreme Court distinguished between two types of fraud: “fraud simpliciter” (simple fraud), which is arbitrable, and serious or complex fraud, which may be non-arbitrable if it vitiates the contract entirely or raises public law concerns. Subsequently, in Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710, the Court articulated a two-part test to determine if fraud is “serious”:

1. Does the allegation of fraud permeate the entire contract, including the arbitration agreement?
2. Are the allegations internal to the parties, or do they have public implications? If the fraud is self-contained between the parties, the dispute is considered arbitrable.

This position was consolidated in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713, which clarified that fraud renders a dispute non-arbitrable only when the arbitration agreement itself is voided or the allegations involve the State or its bodies, raising public law concerns. Finally, the landmark decision in Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, established a four-fold test for non-arbitrability. A dispute is non-arbitrable if it:

1. Relates to actions in rem that do not pertain to subordinate rights in personam.
2. Affects third-party rights or has an erga omnes (towards all) effect.
3. Arises from or relates to the state’s sovereign functions.
4. Is expressly or by necessary implication non-arbitrable under a specific statute.

For foreign-seated arbitrations, the Supreme Court in World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd., (2014) 11 SCC 639, reaffirmed that allegations of fraud do not preclude a reference to arbitration under Section 45 of the Act, provided the arbitration agreement itself is not null, void, or inoperative.

Current Position and Practical Considerations

Under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996 (“the Act”), referral courts now perform a prima facie review limited to the existence of a valid arbitration agreement. Substantive questions of arbitrability, including those related to fraud, are generally reserved for the arbitral tribunal to decide under the Kompetenz-Kompetenz principle.

This approach was reinforced by the seven-judge bench in In re: Interplay between Arbitration Agreements under the Act and the Indian Stamp Act, 1899, 2023 INSC 1066, which affirmed the formal validity of an arbitration agreement is distinct from the merits of the underlying dispute. Current practice is guided by two key clarifications:

• First, the mere existence or pendency of criminal proceedings on the same set of facts does not render a civil dispute non-arbitrable. This was recently upheld by the Bombay High Court in Nilesh Shejwal v. Agrowon Agrotech Industries Pvt. Ltd. on January 5, 2024.

• Second, the argument that fraud disputes are too complex or voluminous for arbitration is no longer considered valid. Tribunals are equipped to manage voluminous evidence, and courts can assist in evidence gathering under Section 27 of the Act if required.

Summary of the Current Legal Position

• Simple Fraud is Arbitrable: “Fraud simpliciter” can be resolved through arbitration. Serious fraud is non-arbitrable only when it invalidates the arbitration agreement itself or involves significant public law issues, as defined in Ayyasamy, Rashid Raza, and Avitel.

• The Four-Fold Test Applies: The test for non-arbitrability laid down in Vidya Drolia is the definitive standard. Disputes concerning rights in rem, third-party interests, sovereign functions, or those statutorily assigned to exclusive forums are non-arbitrable.

• Minimal Judicial Intervention at Referral: Courts primarily examine the existence and basic validity of the arbitration agreement. The tribunal is the preferred forum for deciding complex issues of arbitrability, including fraud, unless the arbitration clause is patently invalid.

• Parallel Criminal Proceedings are Not a Bar: Active criminal cases concerning the same facts do not, on their own, prevent a dispute from being referred to arbitration, as noted in Nilesh Shejwal.

Conclusion and Practical Guidance

Indian jurisprudence has decisively shifted from a broad exclusion of fraud claims to a narrow-exception model that strongly favours arbitral jurisdiction in commercial disputes. Fraud will only nullify a reference to arbitration where the arbitration agreement itself is voided or where the dispute genuinely implicates public law or rights in rem.

For practitioners, it is advisable to draft clear, severable, and seat-specific arbitration clauses. When pleading, fraud allegations should be framed with the twin test (Rashid Raza) and public policy considerations in mind. At the referral stage, advocacy should focus on the limited prima facie review mandated by the Act.

The existence of parallel criminal proceedings should not be seen as an automatic bar to arbitration, and concerns about voluminous evidence can be managed through effective tribunal procedures and court assistance under Section 27.

Finally, relief sought must fall within the bounds of what an arbitral tribunal can grant, particularly in employment contexts where monetary claims are arbitrable but reinstatement is generally not. Adhering to this framework can mitigate forum-related disputes, enhance procedural discipline, and increase the predictability and enforceability of outcomes.

— Team AMLEGALS

Please reach out to us at rohit.lalwani@amlegals.com in case of any query.